US Stocks Rise On Reports Of 'Bad Bank' Plan; DJIA Up 140

AnnelenaLobb

U.S. stocks jumped on Wednesday following reports that the Obama administration is nearing a deal to buy illiquid or bad assets from banking firms.

The Dow Jones Industrial Average was up about 140 points at 8316. The S&P 500 gained 2.4%, driven by a 10% surge in its financial sector, while the Nasdaq Composite Index bounced up by 2.5%.

Late on Tuesday, CNBC reported that President Barack Obama was nearing a "bad bank" plan. Bloomberg News reported on Wednesday that the Federal Deposit Insurance Corp. may manage the plan, citing people familiar with the matter. Some estimates are that the government could take on $1 trillion of bad assets.

A day of sustained momentum for stocks would be a boon, says Gordon Charlop, managing director at Rosenblatt Securities. "We're looking for one of those powerful days to get people to buy into what's happening. People seem to be working on the problems - Davos, the new administration - but there's no confidence yet."

Traders sold the dollar and the yen on reports of the plan while leaving the safe haven of gold, which was well below $900 an ounce. Longer-term Treasurys found some buyers, pushing yields down at the long end of the curve, while the prices of shorter maturities fell slightly.

Adding steam to the sharp rally for banks, Wells Fargo, which reported a $2.55 billion quarterly loss and said Wachovia's quarterly loss was over $11 billion, gained more than 22% after maintaining a 34-cents-a-share dividend.

Gains Wednesday are "obviously driven by financials," says Doreen Mogavero, president of floor-brokerage firm Mogavero, Lee & Co. "All the earnings are out, no more bad news on that front for a while, and it looks like we'll have the program to buy bad assets.

"But we tend to be very euphoric when there's good news - you're probably going to get an overreaction," she added.

The fix for the banking system is crucial "because financing is so important for most companies in this country," said Cleve Rueckert, research analyst at Birinyi Associates. "They need to get financing to expand. They need to get financing to conduct operations. The banking system is the backbone of the economy."

Financial stocks also rallied in Europe, with companies like Lloyds Banking Group, Deutsche Bank and BNP Paribas seeing impressive gains. The pan-European Dow Jones Stoxx 600 gained more than 3%. Asia shares ended higher, with indexes in South Korea and Singapore rallying after a long holiday break.

The Federal Reserve meeting will also be a market focus on Wednesday. Some economists are calling for the Fed to push the federal-funds rate, effectively at zero already, lower still and for the Fed to demonstrate that it's pulling out all the stops to help the economy.

"The Fed's job is going to be to convince markets and the broader public that they can still support the economy ... even with the funds rate at zero," said Al Broaddus, the former president of the Richmond Fed, in a television interview.

Among other stocks to watch, Yahoo shares rose 7.9% after the Internet giant swung to a loss but still beat analyst expectations.

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